In conversation with Mr. Shashike Weerapura, who is currently employed as a Senior Credit Analyst - Corporate Banking at Arab National Bank specializing in corporate credit evaluation in order to understand the lending scenario of Retail and SMEs loan in KSA.
“KSA lending market is a vibrant and thriving sector, playing a crucial role in supporting the growth and development of individuals, businesses, and the Saudi economy as a whole.”.
Q1. How is the overall KSA Lending Market?
The overall lending market in Saudi Arabia, lending market, is robust and dynamic. It has experienced significant growth and transformation over the years. The market is characterized by a wide range of lending products and services offered by banks and financial institutions to cater to the diverse needs of individuals, businesses, and corporate entities.
One important factor of the KSA lending market is its stability. The country's strong economy, driven by sectors such as oil and gas, petrochemicals, finance, and infrastructure, provides a solid foundation for lending activities. The government's focus on economic diversification and initiatives like Vision 2030 further contribute to the growth and stability of the lending market.
In recent years, there has been a push towards digitalization and innovation in the lending sector. Banks and financial institutions are adopting advanced technologies and online platforms to streamline loan processes, enhance customer experiences, and improve access to credit. Moreover, regulations and supervisory measures by the Saudi Arabian Monetary Authority (SAMA), the central bank, ensure a well-regulated lending environment. SAMA's prudent oversight promotes responsible lending practices, risk management, and consumer protection.
Q2. What are some of the important categories in the retail category loan and what is the average ticket size?
Categories such as Home Loans, Auto Loans, and Personal Loans (including both Big and Micro Loans), are quite prominent in the country. When it comes to Home Loans, individuals are typically eligible for a loan amount equivalent to 70% of the property's value, resulting in loan sizes ranging from approximately 0.7-1 million Saudi Riyals.
In the context of Auto Loans, the wealth of Saudi Arabia allows its citizens to afford luxury vehicles like Ferraris, Bentleys, and Mercedes, leading to a high demand for auto loans. Banks and Financial Institutions in the country can provide financing for nearly 100% of the total vehicle cost, with average loan amounts ranging between 60,000 and 150,000 Saudi Riyals.
Furthermore, a company in Saudi has recently introduced a new feature offering micro personal loans to individuals. These loans start at an average range of 2,000 to 3,000 Saudi Riyals and can go up to 10,000 to 12,000 Saudi Riyals in the market. This initiative aims to cater to the financial needs of individuals seeking smaller loan amounts for various personal purposes.
Q3. Is education loan a prominent category in KSA lending market?
No, education loans are not widely available or promoted in Saudi Arabia. Banks and financial institutions in the country do not actively offer education loans as a specific category. This is primarily because education is generally affordable for individuals in Saudi Arabia. Expatriate students often pursue higher education or attend universities outside of the country once they reach the age of 18. On the other hand, Saudi locals may opt for personal loans for educational purposes, using the funds borrowed from a bank. However, overall, education loans are not a significant loan product in Saudi Arabia.
Q4. In Saudi, financing to SMEs have been growing constantly due to vision 2030 in the country. So, what categories of loans do SMEs usually prefer?
In the case of SME loans, various categories such as Asset Financing, Real Estate Financing, Invoice Financing, and Supply Chain Financing are among the major loan categories commonly sought by SMEs. These financing options provide SMEs with essential support for acquiring assets, expanding their business premises, managing cash flow through invoice financing, and optimizing their supply chain operations. These loan categories enable SMEs to access the necessary funds and resources to fuel their growth and drive economic development.
Q5. Do all banks and financial institution categorize SMEs equally, or does credit vary for SMEs among different banks and financial institutions?
Each bank and financial institution have its own unique definition of Small and Medium Enterprises (SMEs). While the Saudi Arabian Monetary Authority (SAMA) may have established a standard based on average turnover, individual banks classify SMEs differently. For instance, Bank “A” has a set maximum turnover limit of SAR 300 Mn per year for SME companies, whereas another Bank “B” has a set limit at SAR 500 Mn per year. Consequently, any company exceeding SAR 300 Mn turnover, for Bank “A” it is considered a corporate entity rather than an SME. Hence, each financial authority determines the definition of SMEs according to their own discretion, leading to varying credit disbursement practices for SMEs.
Q6. How long is the typical duration for the loans that SMEs usually seek?
The duration of SME loans varies depending on the loan category. For instance, invoice financing typically has an average duration of 3-4 years under a revolving contract arrangement. In supply chain financing, the maximum loan duration is typically limited to 1 year. Asset financing, on the other hand, usually has a duration of 3-4 years. Real estate financing, with its focus on property-related investments, typically spans a tenure range of approximately 5-10 years.
Q7. What is the scenario of corporate loans in the lending market of KSA?
Corporate loans refer to loans obtained by corporate entities with a significantly large loan amount. In Saudi Arabia, most corporate lending practices do not require collateral as security. Instead, these loans are granted based on a foundation of trust, with personal guarantees provided by major shareholders or partners to ensure loan repayment. The credit amount is supported by the cash flows of the borrowing companies.
Prior to loan approval, a comprehensive credit analysis is conducted, examining the cash flows of the borrowing companies and thoroughly evaluating both the financial and non-financial aspects of the projects for which the corporate entities require funding. The average loan size sought by these corporations typically falls within the range of 400-500 million Saudi Riyals.
Q8. How long is the typical duration for the loans that Corporate usually seek?
There are no specific restrictions on the duration of loans that corporate entities can obtain. The duration can vary widely, ranging from one year to as long as eight years, depending on the specific project for which these corporations require financing. The tenure is determined based on the unique needs and nature of the project, ensuring that the loan duration aligns with the anticipated timeline and requirements of the corporate undertaking.
Q9. In case of lending market in particular, do banks dominate the industry or NBFIs contribute towards a larger share?
In the case of lending, banks dominates the industry as a whole. Especially in the case of corporate loans, it is only banks which dominates the industry. Again, a company which is taking loan from an NBFI can only be considered an SME by a bank. Like I mentioned previously, for one bank, the definition of SME can be different and for another bank it can be different. Similarly, a company which is considered as a corporate company by an NBFI might not be considered as a corporate for a bank. Hence, in order to understand the lending market better, banks can give a better picture of whole industry as they largely dominate the space. In the case of Retails and SME financing, around again 80-85%% of market is captured by banks. Only in case of BNPL, banks are not involved as no banks offer BNPL as a service to customers.
Q10. Are loan defaults high in Saudi Arabia? If so, do retail loans experience higher default rates compared to SME loans, or is it the opposite?
Typically, the default rate is quite low in all loan categories, including retail, SME, and corporate loans, in Saudi Arabia. When compared to European or South-East Asian markets, the default rate is exceptionally low. There are a couple of factors contributing to this. Firstly, the high disposable income of residents plays a significant role in maintaining low default rates. Secondly, the stable economic conditions in Saudi Arabia have helped mitigate defaults. Even during the COVID-19 lockdown, while other economies faced significant challenges and widespread layoffs, Saudi Arabia remained relatively stable. Additionally, the central bank provided support by funding the interest payments for all SME loans in the country, a practice that continued for over two years. As a result, the Saudi lending market boasts a remarkably low level of non-performing loans across both retail and SME segments.
Q11. What is the future outlook of the lending market in KSA? What is your expectation is on the growth potential of product categories?
The future outlook for the lending market in Saudi Arabia appears promising. Specifically, in the case of retail loans, particularly home loans, the Government of Saudi Arabia has set an ambitious target through Vision 2030 to increase homeownership to 70-75% by the year 2030. This objective is expected to drive a substantial surge in the market, and other loan categories are likely to experience simultaneous growth.
The overall banking market is projected to expand by approximately 10-15% in the future, indicating a positive growth for the lending sector. Consequently, all types of loans, including retail loans, SME loans, and corporate loans, are anticipated to grow in line with this rate of expansion.
This anticipated growth in the lending market aligns with the broader vision of economic development and diversification outlined in Vision 2030, which aims to transform various sectors of the Saudi economy and promote sustainable growth.